China central bank cuts reserve ratio to bolster tepid growth

China's central bank stepped up efforts to cushion its economic slowdown amid plunging stock prices and a weakening currency, cutting the amount of cash the nation's lenders must lock away.

The required reserve ratio will drop by 0.5 percentage points effective March 1, the People's Bank of China said on its website Monday. That will take the level to 17 percent for the biggest banks, still one of the highest such ratios in the world. The move marks a return to more traditional easing after the central bank indicated it would spur growth by guiding interbank markets lower and injecting liquidity through open-market operations.

Governor Zhou Xiaochuan highlighted scope for further action when he spoke ahead of the Group of 20 meeting in Shanghai last week. Finance Minister Lou Jiwei said at the event that China will expand its fiscal deficit to support structural reforms to the economy, which slowed to a 6.9 percent growth pace last year, the weakest since 1990.

"Officials are making good on their promise at the G-20 to pull all policy levers to stabilize growth," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. The reduction "suggests that officials believe that they have succeeded in reining in capital outflows, after deferring explicit monetary easing in January over worries this could accelerate outflows."

The People's Bank of China has been trying to restore stability to the nation's currency after outflows hit a record pace in recent months. Reductions to the required reserve ratio -- which will allow banks to lend more -- help compensate for the departure of money. The central bank said it lowered the RRR rate to guide stable and appropriate growth in credit and create appropriate monetary and financial conditions for supply-side structural reform, according to a statement on its website. The Shanghai Composite Index has declined 24 percent this year, the worst performer among 93 global equity indexes. China's stocks are poised to rally Tuesday after the move, said Chen Jiahe, strategist at Cinda Securities Ltd., said.

"Blue-chip stocks may get a boost tomorrow due to their high correlation to the economy," Chen said.

China's central bank has preferred a newer mone- tary approach in recent months, guiding money market rates lower and injecting funds.

"The People's Bank of China had signaled that it was moving away from blunt instruments like the RRR, and toward more subtle tools to manage liquidity and interbank rates," Bloomberg Intelligence analysts Tom Orlik and Fielding Chen wrote in a note. "That adds to the surprise factor in the return of the RRR."